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| The US and the China Challenge |
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- - Dr. Peter Morici Professor Peter Morici is a recognized expert on international economic policy, the World Trade Organization, and international commercial agreements. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. Much like the United States after the Civil War, China is rapidly industrializing and becoming wealthy and influential on the global stage. In our public debate about China, we hear a lot about trade and cheap goods at Wal-Mart, Chinese competitors driving U.S. manufacturers out of business and American workers losing well-paying jobs. These are important issues, but the challenge China poses is about something much bigger than money. It is about whose values will prevail. Americans think individuals, following their own interests and building their own lives, best chart the progress of a nation. Governments draw their legitimacy from collective approval, because the people, collectively, are the sovereign. Americans think markets should guide their economy. Although the government should assist the young and disadvantaged in becoming effective participants, it should not play favorites. Americans reject cronyism or governments' picking which companies or industries prosper. Let evenhanded competition decide. Democracy and markets are embedded in the very DNA of the American character. Our political and economic institutions organize competition among individual ideas and initiatives that define our civic and material lives. We think democracy and markets are mutually reinforcing. Markets work best when personal freedoms are protected, and democracy does the best job of safeguarding those. Free markets give individuals a strong interest in securing democracy. To protect these values and ensure their success, the United States has worked with allies in Europe and elsewhere to build an international system that supports democracies and permits market economies to flourish. The United States doesn't always agree with its friends abroad, but that hasn't stopped it from working with allies to develop a human-rights system under the auspices of the United Nations and global economic institutions such as the World Trade Organization. These institutions reflect a good measure of American values. What is emerging in China is at odds with this vision of a world order that respects and protects individual liberty. Chinese realities In the late 19th century, China suffered great humiliation at the hands of the Western powers and in World War II at the hands of the Japanese. The Communist regime that followed destroyed what beginnings were present of Western-style capitalism and democracy. Through the 1970s, the Communist Party enforced rigid state ownership and central planning for industry and agriculture, and it imposed an authoritarian plutocracy that demanded conformity of thought and deed. Communist economic policies did fill people's bellies but by most measures kept the country backward. In the late 1970s, China began a process of economic reform, permitting private property, rudimentary capital markets, more trade with the West and significant foreign investment. This process accelerated through the 1990s and culminated in China's membership in the World Trade Organization in 2001, with U.S. and European Union approval. Despite this progress, China is hardly a market economy. Imports and exports are controlled by tariffs, tax breaks, quotas and restrictions on conversions of yuan into foreign currencies. Foreign investors, such as Citibank, General Motors and Microsoft, are regulated. For example, ownership positions and component imports are limited, and often foreign companies are required to transfer valuable technology. Most banks remain under state control, loan money at low rates and forgive loans to enterprises the government wishes to encourage. Since 1995, China has pegged its currency to the dollar and keeps it undervalued by buying dollars and foreign securities. Last year, Chinese financial authorities spent more than $200 billion on such purposes -- about 12 percent of China's gross domestic product -- and the currency is 40 percent undervalued. This places a 40 percent tax on imports and similar subsidies on exports. This manipulation clearly violates free-trade principles. It artificially makes Chinese goods cheap here and U.S. goods expensive in China. Chinese currency manipulation contributes mightily to the U.S. trade deficit. It is wiping out well-paying manufacturing jobs in the Midwest and Southeast, and provides the Chinese government with lots of cash to pursue other items on its political agenda. Through these and other means, the Communist Party still exerts great influence over what goods Chinese industries produce, who makes those goods and -- importantly to Americans -- what China buys and sells in the United States and elsewhere around the globe. Essentially, a developing government that controls imports and exports, foreign-exchange conversion, bank financing and foreign investment can direct the path and structure of economic development. Politically, China is not a Western nation as, for example, Japan and Taiwan have become. Nor is China a 19th-century America. China has an authoritarian government, and the Communist Party has announced no plans or timetable for relinquishing power. By word and deed, the Communist Party assumes parental authority over Chinese citizens and asserts sovereignty, without consent, over all people within its borders and ethnic Chinese beyond them. It censors the Internet and seeks to strictly control the ideas and information about foreign events its citizens receive. Even overseas Chinese teaching and studying at Western universities are subject to arrest and imprisonment for what they may say or write while outside the country when they return to China. China embraces market reforms only as necessary and seeks to participate in global markets on its own terms. Unless compelled by need, the Chinese government is not about to embrace market reforms that could instigate popular sentiment for democratic change. Unlike 19th-century America, China's development is not driven by largely home-grown technologies, abundant resources or skilled labor. In the 19th century, Americans either pioneered or made important contributions to steam power, the railroad, telegraph and other major technologies. The United States had the advantage of considerable resource wealth to power development, and wages were much higher than in Europe or Asia; this attracted skilled immigrants. In contrast, China is accomplishing growth with other people's technology, on the backs of cheap labor, and is desperately dependent on Middle Eastern oil and other imported resources. It is compensating for its shortcomings, and then some, by maintaining an undervalued currency, subsidizing exports and keeping the living standards of workers artificially low. China is building a middle class but on the backs of factory labor paid less than the value it creates. Overall, the new China that is emerging looks much like fascist Japan and Germany in the 1930s: private ownership of business with state management of key industries, and an authoritarian government managing the nature and path of development. Chinese success poses a direct challenge to the model of democratic capitalism we offer to Asian nations and the world, and the U.S. response to this challenge has been naive. Failing U.S. policies About the future of China, two bets are on the table. During the Cold War, U.S. moderates advocated and won a policy of engagement toward the Soviet Union; they thought the Soviet people would see, through our example, the power of individual liberty and free enterprise, and that this would inspire change from within. Now, those principles are being applied to China, because many think they worked with the Soviet Union. The Bush administration does not effectively challenge China on issues such as currency manipulation, because it thinks confronting Beijing would strengthen militants who resist reforms. In a nutshell, the Bush administration thinks challenging Chinese actions harmful to Americans interests would cause even more harmful Chinese behavior. Instead, the administration pursues a policy of cajoling China and accommodating Beijing when it resists, assuming it will ultimately create a China sympathetic to the American vision of a peaceful, democratic world. This is a fool's journey. The Soviet Union collapsed, not because it bought into Jeffersonian ideas but because its economy failed. China's economy is succeeding. Don't look for its leaders to call for free elections, and even accede to an uncensored Internet and media, anytime soon. Ultimately, the Communist Party is betting that if it modernizes the Chinese economy, provides citizens with prosperity and security, and uses economic success to win influence for China throughout Asia and beyond, it won't have to relinquish power. In the process, the Communist Party resists Bush administration suggestions that it accelerate economic reforms, knowing it does not have to bend to a U.S. government that fears Chinese reactions. To sustain its grip on power, the Communist Party has a strong interest in selling China's brand of authoritarian capitalism to its neighbors, and making the international rules of the game less supportive of democracy and human rights. The Chinese government sees itself as redressing hundreds of years of Western humiliation and emboldened by recent economic success, boasts that China soon will be making the international rules of the game, as opposed to conforming to quaint Western norms. To the dismay of the Bush administration, China is leveraging its economic clout into broader diplomatic influence in Asia. It has signed or is negotiating trade agreements with many countries in Asia, the South Pacific and a few elsewhere. This escalates the risk that its brand of state-managed capitalism will gain greater influence and acceptance among our allies and become permanently entrenched in China and elsewhere. China is undermining U.S. efforts to secure peace in Iraq and end North Korea's nuclear program. To secure its supply of oil, extend its influence and solidify internal security, the Chinese government is building a blue-water navy and spending massively to modernize its army. End accommodation Seen in this context, the present policy of engaging China is very unwise. Accommodating China is not working, and everywhere we look, China is raising the stakes. Pressuring China to change by imposing explicit, substantial costs when its actions harm others makes more sense. For industries harmed by subsidized Chinese imports into the U.S. market, direct trade sanctions can redress the situation and better promote trade and employment based on genuine comparative advantages. That means targeted trade sanctions if China does not revalue its yuan and does not respect intellectual property, and if it exploits worker rights to achieve export advantages or otherwise breaks the norms and rules it acknowledged by joining the World Trade Organization, International Labor Organization and other international organizations. It's time to face up to the fact that China, rather than evolving into a democratic society with a market economy, could just as easily morph into a fascist menace with global reach. Not recognizing this challenge and acting to address it means contributing to China's success and supporting its agenda to our peril. Appeasement didn't work for Britain dealing with Germany in the 1930s, and it is not working for America with China now. Source: www.finfacts.com Nov 15, 05 |
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